What you need to know about M&A confidentiality agreements

Most M&A transactions are material to the parties involved, and public disclosure that a deal is in the offing can have profound effects on a company’s operations, ranging from employee attrition to loss of confidence by commercial counterparties. Of course, for public companies, exploration of strategic alternatives may constitute material nonpublic information implicating Regulation FD (which restricts selective disclosure) as well as Exchange Act Rule 10b-5 and insider trading rules. Disclosure could impact public companies’ relative trading value, as well, which could interfere with closing a deal, and untimely disclosure may tip off potential interlopers who submit alternative bids and disrupt the transaction.

For these and other reasons, parties considering both private and public M&A typically begin discussions with negotiation of a confidentiality agreement, or non-disclosure agreement (NDA). These are usually relatively short (2-6 page) agreements that restrict one or both parties from disclosing the existence of discussions as well as the terms and conditions of any potential deal and information about one or both parties’ businesses.

Below, I’ll answer the following questions about NDAs used in M&A deals:

Please keep in mind that these answers are not intended to be comprehensive. I’ll just cover the highlights. Also, please let me know if there’s something you’d like me to cover beyond these topics.

Want to buy a confidentiality agreement?

Does it matter if M&A confidentiality agreements are mutual or one-way?

A gating issue to consider in preparing an M&A confidentiality agreement is whether the contract will grant only one party the right to protect information or whether that right will be reciprocal. In deals involving only one party disclosing confidential information to the other, such as, for example, where a small company is looking to sell assets to a large public company for cash, it may be appropriate to enter into an NDA that only protects the seller’s information (sometimes referred to as a “one-way” confidentiality agreement). In other transactions, where, for example, each party is making disclosures to the other about its respective business and assets, a mutual NDA may be necessary.

But you may be asking, why does it matter? If I’m not disclosing sensitive information to the other party, I don’t care. Right?

In some respects, that is absolutely correct. If you aren’t disclosing anything sensitive, you don’t care about protecting your information. However, there may be more subtle implications of the choice between the two types of agreements. Mutual NDAs tend to be more balanced and reasonable than one-way agreements. If the drafting party knows that it will be bound by the same restrictions it is seeking to impose on the other, as it would be under a mutual agreement, it will generally be more moderate in its approach. This frequently makes the negotiation process much simpler and faster. On the other hand, it also means that the protections afforded to the disclosing party under a mutual NDA may be more limited than the alternative.

How should I define “Confidential Information” or “Evaluation Material”?

The restrictions on disclosure contained in a typical NDA apply only to a specifically identified category of information, most commonly defined within the agreement as “Confidential Information” (but also sometimes called “Evaluation Material” in the M&A context). The term may be defined broadly to cover a lot of information or narrowly to cover very little. Broader definitions favor the disclosing party, and narrower definitions favor the party receiving information.

If your goal is to broaden the definition of “Confidential Information,” include in the definition information that:

relates not only to the discloser, but also to its affiliates,
was not just delivered but also “made available” to the receiver (an important nuance when providing information through a virtual data room),
was not just provided by the discloser but also by any of its affiliates and its and their respective owners, directors, officers, employees, representatives and other agents,
is in electronic or physical form, including all copies, notes and other embodiments developed by the receiver and its representatives based in any way on the Confidential Information,
may or may not have been marked “confidential” or otherwise communicated to be confidential or proprietary and
was provided after or before the date of signing the NDA.

In addition, the fact that discussions between the parties are taking place should be deemed “Confidential Information.” This is particularly important in NDAs entered into in anticipation of an M&A deal. Also, exclusions should be drafted narrowly. These commonly include information that:

is generally available to the public other than as a result of disclosure by the receiver,
is available to the receiver from another source that isn’t prohibited from disclosing it or
is independently developed by the receiver without violating the NDA.

Lastly, do not make the mistake of conflating the permissible disclosure provisions (discussed below) with exceptions to the definition of Confidential Information. From the discloser’s perspective, the fact that certain information may be disclosed under agreed-upon circumstances should not thereby cause the information to cease to qualify as Confidential Information. That would have the effect of permitting the receiver to misappropriate the information simply because, for example, it may have been compulsorily disclosed to a court.

If, on the other hand, your goal is to narrow the definition of “Confidential Information” (i.e., if you are the receiving party) take the opposite position with respect to each of the foregoing points.

What should a recipient be required to do (or be prohibited from doing) with Confidential Information?

Most well-written confidentiality agreements entered into in anticipation of an M&A transaction include a covenant requiring the Confidential Information to be “used solely for the purpose of evaluation of a possible transaction” or words to that effect. This is one of the more important provisions of an NDA and isn’t normally subject to much negotiation or modification.

Conversely, there is usually quite a bit of back and forth about the standards that will govern the receiving party’s handling of Confidential Information in its possession. This can range from a low standard of protection that is favorable to the receiver (e.g., “the Receiving Party shall exercise reasonable efforts to preserve the confidentiality of the Confidential Information”) to a more stringent standard that would be preferred by the discloser, such as:

“The Receiving Party shall keep the Confidential Information strictly confidential and shall not sell, trade, publish or otherwise disclose all or any part of it to anyone in any manner whatsoever, including by means of photocopy or reproduction, without the Disclosing Party’s prior written consent, which may be withheld, conditioned or delayed in the Disclosing Party’s sole and absolute discretion, except as expressly provided in this Agreement. The Receiving Party shall use at least the same level of care to protect the confidentiality of the Confidential Information as it does to protect its own confidential or proprietary material, and in any event not less than reasonable care. At its sole expense, the Receiving Party shall take all measures (including pursuing court proceedings) necessary to restrain its Representatives from disclosure or use of any Confidential Information that is prohibited or not expressly authorized in this Agreement. To the extent not already marked, the Receiving Party and its Representatives shall mark each page, whether physical or electronic, of all Confidential Information received or prepared by the Receiving Party and its Representatives with the following legend: ‘Strictly Private and Confidential – Proprietary Information of [Discloser’s Legal Name] – Subject to Confidentiality Agreement.'”

It’s rare for parties to agree to language equivalent to either of these extremes. More often than not, they will find a middle ground that provides for a reasonable level of protection of Confidential Information with some amount of accountability by the receiver for the conduct of its representatives.

Are there typical exceptions to restrictions on disclosure?

Yes, despite the usual restrictions, most confidentiality agreements permit the receiving party to disclose Confidential Information if required to do so by law or equivalent binding authority (e.g., stock exchange listing requirement). This is an important exception to the agreement’s restrictive covenants. Without it, the agreement could violate applicable law, such as, for example, IRS regulations requiring disclosure of the tax treatment and tax structure of certain transactions.

The core concept of an exception for legally mandated disclosure is almost never subject to negotiation (though it is often, presumably unintentionally, omitted from many short-form NDAs). Yet there is usually back and forth as to the parameters of this exception and what steps must be taken by the receiving party before it is permitted to rely on it. For example, the exception may require:

immediate, prompt or prior notice to the discloser of the legal requirement before disclosure is made (but subject to any legal restrictions on providing such notice),
written vs. verbal notice,
cooperation with, or assistance of, the discloser in resisting the mandatory disclosure,
incurrence of related expenses by the receiving party,
disclosure only to the extent necessary to comply with the mandate,
efforts by the receiving party to ensure any Confidential Information disclosed is afforded confidential treatment and/or
a written or informal legal opinion stating that the proposed disclosure is legally required.

Virtually all confidentiality agreements that expressly permit mandatory disclosure end up reflecting some combination of these requirements for reliance on the exception.

What happens to Confidential Information after termination of discussions?

M&A confidentiality agreements generally require receiving parties to return or destroy Confidential Information upon termination of discussions of a deal and/or upon request of the discloser. After all, information provided during the course of M&A due diligence may be extremely competitively sensitive, and its misuse or public disclosure may be quite detrimental to the subject company.

Frequently, a discloser will request that the receiving party certify its compliance with this covenant. It’s unclear that such a covenant actually provides any additional legal protection for the discloser given that the receiving party is in any event still obligated to destroy or return the materials. However, it may provide comfort to the discloser that the covenant was actually complied with and may additionally substantiate a claim of fraud (which could entitle the discloser to a higher damages award than a breach of contract claim would) if the certification turns out to be false.

Prudent receiving parties often negotiate for exceptions to return or destruction provisions like these, though, to ensure they account for the realities of contemporary communications and business practices. While it once may have been possible to return or destroy all physical and electronic copies of relevant information, use of third party email services, server backup routines, cloud computing and proliferation of mobile devices among other technological developments have made it increasingly impracticable, if not altogether impossible, to return or destroy all Confidential Information in the possession or control of a recipient. Similarly, many organizations are subject to regulations that require them to retain copies of certain materials in their possession for a period of time that may exceed the duration of discussions, and return or destruction provisions may need to be circumscribed to accommodate these requirements.

Despite these limitations, disclosing parties will often in turn demand a requirement that the confidentiality restrictions set forth in the NDA will continue to apply for a period of time to any Confidential Information that is not returned or destroyed by the receiver, notwithstanding the ordinary expiration or termination of such restrictions as they apply to other information.

How do I enforce my rights under the agreement?

If the receiving party breaches an NDA, the disclosing party looking to protect its information must pursue legal recourse in court (or in arbitration if required under the agreement). Monetary damages are often extremely difficult for a plaintiff to prove as a result of a breach of a confidentiality agreement. Consequently, a discloser’s best opportunity for recourse may be to seek injunctive or equitable relief (a court-ordered act or prohibition against an act) to stop any further disclosures. To that end, disclosing parties often request language that will make it easier to obtain such relief. Here’s an example that is favorable to the discloser:

“Each Party acknowledges and agrees that the other Party would be irreparably injured by a breach of this Agreement by the other Party and that money damages are an inadequate remedy for an actual or threatened breach of this Agreement because of the difficulty of ascertaining the amount of damage that will be suffered by either Party in the event that this Agreement is breached. Therefore, each Party agrees to the granting of specific performance of this Agreement and injunctive or other equitable relief in favor of the other Party as a remedy for any such breach, without proof of actual damages. Each Party further waives any requirement for the securing or posting of any bond in connection with any such remedy. Such remedy shall not be deemed to be the exclusive remedy for a Party’s breach of this Agreement, but shall be in addition to all other remedies available at law or equity to the other Party. Each Party also agrees to reimburse the other for all costs and expense, including attorneys’ fees, incurred by the other Party in enforcing the first Party’s obligations under this Section.”

While provisions like these designed to facilitate equitable relief are found in most M&A confidentiality agreements, they are rarely this pro-discloser. Instead, you will often encounter receiving party pushback on such terms as “would be irreparably injured” or “are an inadequate remedy,” instead preferring phrasing that may not be as helpful to the discloser-plaintiff along the lines of “may be irreparably injured” or “may be an inadequate remedy.” Similarly, the provision might state that the discloser-plaintiff may “seek” injunctive relief rather than being acknowledged as entitled to it. Depending on the law governing the contract, these changes may either moderate or completely undermine the purpose of the provision so disclosing parties should be careful in agreeing to them.

Of course, receiving parties also prefer not to include expense reimbursement language. Under most states’ laws, the parties to litigation will usually bear their own costs. Obviously, the allocation of costs may have a material effect on the discloser’s incentives to pursue relief under the contract.

How long should restrictions last?

The duration of confidentiality restrictions in M&A confidentiality agreements is a tricky subject. There are quirks of applicable rules that may have unintended consequences. First, confidentiality restrictions are not necessarily coterminous with the duration of the NDA itself. You may want the restrictions on disclosure to expire on a specified date (e.g., two years after signing the agreement) while other provisions of the agreement continue for a period of time after expiration of the restrictions (e.g., those governing dispute resolution).

Second, depending on the law that governs the contract, remaining silent as to the duration of confidentiality restrictions may not, as you might expect, have the effect of making them perpetual. On the contrary, if you remain silent in some jurisdictions you run the risk of having a judge interpose his or her judgement as to what a reasonable duration should be. This may end up being a shorter (or longer) period of time than the parties would have negotiated on their own. Accordingly, before electing to say nothing about termination of the agreement or expiration of confidentiality restrictions, be sure to understand the consequences under the governing law.

Third, consider whether trade secrets may be disclosed under the NDA. This is often the case during M&A due diligence. Trade secrets are protected under common (i.e., judge-made) law until such time as they are no longer trade secrets. That means that restrictions on disclosure of trade secrets of indefinite or perpetual duration are more likely to be enforced so long as the owner continues to take reasonable efforts to maintain the information’s secrecy. If, in contrast, a company discloses information to a third party using an NDA with confidentiality obligations that expire, then the information will under most circumstances cease to be protectable as a trade secret after the restrictions lapse. Because receiving parties have no duty to maintain confidentiality after the specified time period, courts will not usually allow a company to claim that the information is a trade secret, even if the company is suing an unrelated party for misappropriation of the information.

Lastly, as mentioned above, receiving parties who negotiate exceptions to “return or destroy” provisions should be prepared to maintain confidentiality restrictions on retained Confidential Information for a longer period of time than the baseline survival period applicable to other information covered by the NDA.

Taking all of these considerations together, then, a well-written confidentiality agreement should contain a specified period of confidentiality (or its equivalent, a contract termination provision that identifies certain provisions that will survive termination of the agreement) that applies a longer, and perhaps indefinite, period of confidentiality to trade secrets and Confidential Information that is not returned or destroyed upon termination of discussions regarding the applicable deal.

How do I stop the other side from stealing my employees and clients?

Parties to potential M&A deals are frequently afforded a great deal of access to the other party’s personnel, vendors, suppliers and other commercial counterparties during the negotiation and due diligence process. Meanwhile, the companies are often direct competitors or participating in the same industry with overlapping business needs. They may therefore attempt to poach one another’s employees and commercial partners if the deal doesn’t close, or even if it does close, if the transaction involves a sale of a division or the parties otherwise remain independent post-closing.

To mitigate this risk, M&A sellers, and sometimes buyers, insert provisions into NDAs that prohibit the other party from soliciting their employees and commercial counterparties. Here’s a typical example:

“The Receiving Party will not, and will cause its affiliates not to, for a period of __ years from the date hereof directly or indirectly (a) employ any individual who is as of the date hereof or at any time during such period an employee of the Disclosing Party or its subsidiaries; provided that the Receiving Party will not be prohibited from employing any such individual (i) whose employment with the Disclosing Party or its subsidiaries has been terminated by the Disclosing Party or its subsidiary, as applicable; or (ii) who responds to a general solicitation of employment through media advertisements not targeted specifically at any employees of the Disclosing Party or any of its subsidiaries; or (b) cause, induce or attempt to cause or induce any customer, strategic partner, supplier, distributor, landlord of, or others doing business with, the Disclosing Party or any of its affiliates to cease or reduce the extent of its business relationship with the Disclosing Party or its applicable affiliate or to deal with any of the Disclosing Party’s or its affiliates’ competitors.”

While such provisions may seem appropriate and perfectly reasonable from one perspective, there are also equally valid bases for resisting them, particularly where the transacting parties have large operations that may compete in a number of industries and geographic areas. It may be difficult, and sometimes practically impossible, to monitor every new employment decision or commercial relationship to ensure compliance with provisions like this, and companies rightly do not want to run the risk of unknowingly incurring liability for breach. This problem is compounded for large companies that may be asked to sign multiple non-solicitation provisions like these.

What is a standstill provision?

In M&A deals involving target companies with publicly-traded shares, targets will usually refuse to offer due diligence to any potential buyer that may attempt a hostile acquisition (an acquisition without the consent of the target’s board of directors) or engage in other coercive activities. Otherwise, targets may not only be increasing the likelihood of a hostile bid or destabilization campaign but also its chances for success. Consequently, public company targets typically insert standstill provisions into M&A confidentiality agreements. These clauses restrict the potential buyer from acquiring additional target company shares, participating in a proxy contest, launching a tender offer or taking any coercive actions.

Here’s an example standstill provision:

“For a period of ___ [years] [months] from the date of this Agreement, neither you nor any of your Representatives or affiliates will in any manner, directly or indirectly, without the prior written consent of the Company or its board of directors:

(a) acquire, offer to acquire, or agree to acquire, directly or indirectly, by purchase or otherwise, any [voting] securities or direct or indirect rights or options to acquire any voting securities of the Company or any of its subsidiaries, or of any successor to or Person in control of the Company, or any assets of the Company or of its divisions or of any such successor or controlling Person;

(b) make, or in any way participate, directly or indirectly, in any, “solicitation” of “proxies” (as such terms are used in the rules of the United States Securities and Exchange Commission), or advise or seek to influence any Person with respect to the voting of any voting securities of the Company or any of its subsidiaries;

(c) make any public announcement with respect to, or submit a proposal for, or offer of (with or without conditions) any tender or exchange offer, merger, recapitalization, reorganization, business combination or other extraordinary transaction involving the Company or any of its subsidiaries or any of their securities or assets;

(d) form, join or in any way participate in a “group” as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, in connection with any of the foregoing;

(e) otherwise act, alone or in concert with others (including, without limitation, by providing financing to another party), to seek or offer to control or influence the management, board of directors, policies or affairs of the Company;

(f) advise, assist or encourage any other Persons in connection with any of the foregoing; or

(g) request the Company or any of its Representatives, directly or indirectly, to amend or waive any provision of this paragraph.

You will promptly advise the Company of any inquiry or proposal made to you with respect to any of the foregoing.”

Some bidders will argue that the target does not require a standstill provision because the confidentiality obligations contained in the confidentiality agreement provide it with sufficient protection. Target companies are likely to reject this argument because, if there is no standstill provision and the bidder makes a hostile bid, then the target may have difficulty proving that the bidder has used the target’s information in violation of the confidentiality agreement. It would be easier for the target to prove that the bidder has violated a standstill provision.

Target companies should be mindful that the standstill provision should not be used to favor one bidder over another improperly when Revlon duties requiring maximization of shareholder value have been triggered.

Gayatri GuptaJanuary 25, 2024

Nasdaq Compliance

The Nasdaq Stock Market features three tiers of listed companies, namely: (1) The Nasdaq Global Select Market, (2) The Nasdaq Global Market, and (3) The Nasdaq Capital Market. These tiers are characterized by progressively stringent listing requirements, with the Nasdaq Global Select Market setting the highest standards for initial listings and the Nasdaq Capital Market serving as the entry-level tier, particularly suitable for most small-cap issuers.

To list securities on Nasdaq, a company must fulfill minimum listing requirements, encompassing defined criteria related to financial performance, liquidity, and corporate governance. Nasdaq retains extensive discretion in the listing process and reserves the right to reject an application, even if the technical prerequisites are satisfied, if it deems such denial essential to safeguard the interests of investors and the public.

After securing a listing on Nasdaq, a company is obligated to adhere to ongoing listing standards. To initiate the listing process, a company seeking inclusion on Nasdaq must diligently complete and submit a comprehensive listing application to Nasdaq. This application should include specific documents and information as outlined by Nasdaq's requirements.

Typically, the application process spans a duration of four to six weeks. Once the application is submitted, a Nasdaq analyst is designated as the primary liaison with the company. Within two to three weeks of submission, the company can expect to receive an initial comment letter. The comment and review process persists until a decision is reached on the approval or denial of the application. Similar to filing with the SEC, a meticulously prepared Nasdaq application tends to attract fewer comments and facilitates a more streamlined process. Generally, the company's securities counsel assumes a leading role, serving as the primary contact for preparing the application and engaging in communication with Nasdaq.

Similarly to the SEC review process, Nasdaq conducts a thorough examination of publicly accessible information pertaining to a company. This encompasses, but is not limited to, SEC filings, the company's website, management communications and speeches, as well as press releases. The iterative nature of the review process typically doesn't necessitate a formal protocol, and communication is commonly facilitated through email correspondence and phone calls.

Listing Criteria For Nasdaq
For a company to list its securities on Nasdaq, it must satisfy the following criteria:

Specific Initial Requirements:
- Quantitative Standards: Meeting defined thresholds for both quantitative and qualitative factors.
- Qualitative Standards: Fulfilling certain qualitative benchmarks.
Continuing Requirements:
- Quantitative Criteria: Adhering to ongoing quantitative benchmarks.
- Qualitative Criteria: Maintaining specified qualitative standards.

The initial quantitative thresholds are typically set at a higher level than those required for continued listing. This distinction aims to ensure that companies achieve a sufficient level of maturity before being listed. Additionally, Nasdaq imposes rigorous corporate governance standards that listed companies must adhere to throughout their tenure on the exchange.

Before formally submitting a comprehensive listing application, a company has the option to pursue a preliminary listing eligibility review. In this stage, the Listing Qualifications Staff conducts a thorough examination of the company's public filings to assess its compliance with numerical listing requirements. Additionally, the team evaluates the company's adherence to corporate governance requirements outlined in the Marketplace Rules ("Rules"). This preliminary review provides valuable insights into the company's eligibility for listing on Nasdaq before committing to the full application process.

Upon completion of the preliminary review, the Listing Qualifications Staff will make an assessment regarding whether the company meets the numerical listing criteria. Additionally, any corporate governance or regulatory concerns raised during this phase will be considered to determine their impact on the listing approval. It's important to note that while the preliminary review provides insights, final approval necessitates the submission of a formal listing application. This application undergoes a thorough examination by the NASDAQ Listing Qualifications Staff. Furthermore, the final approval process involves satisfactory compliance with specific qualitative reviews. This includes an examination of the regulatory history of the company's officers, directors, and significant shareholders. Meeting these criteria is integral to obtaining the final approval for listing on Nasdaq.

Financial And Liquidity Requirements

    Requirements

    Equity Standard
    Market Value of Listed Standard
    Net Income Standard

    Listing Rules

    5505(a)
and
5505(b)(1)
    5505(a)
and
5505(b)(2)
    5505(a)
and
5505(b)(3)
    
    Stockholders Equity

    	$5 million
    	$4 million
    	$4 million
    
    The market value of publicly held shares

    $15 million
    $15 million
    $
      5 million
    
    Operating History

    	Two years
    N/A
    N/A
    
    The market value of listed securities

    N/A
    $50 million
    N/A
    
    Net income from continuing operations (in the latest fiscal
a year or in two of the last three
fiscal years)

    N/A
    N/A
    $750,000
    
    Publicly held shares

    	1 million
    	1 million
    	1 million
    
    Bid Price

    	$4
    	$4
    	$4)
    
    Closing Price

    	$3
    	$2
    	$43
    
    Corporate Governance

    Yes
    Yes
    Yes
    
    Total Shareholders

    300
    300
    300

Corporate Governance Requirements

Across all three tiers of the Nasdaq Stock Market, corporate governance requirements remain largely consistent. The categories encompassing corporate governance standards include:

Distribution of Annual or Interim Reports
Independent Directors
Audit Committee
Compensation Committee
Nomination of Directors
Code of Conduct
Annual Meetings
Solicitation of Proxies
Quorum
Conflict of Interest
Shareholder Approval
Voting Rights

These governance elements play a crucial role in ensuring transparency, accountability, and ethical conduct within listed companies, irrespective of the specific tier within the Nasdaq Stock Market.

Companies seeking listing on Nasdaq must adhere to specific corporate governance standards, including the following:

Compensation Committee with Independent Directors:
- The company is required to establish a compensation committee comprised of independent directors.
- The committee must consist of at least two members.
- Rule 5605(d)(2)(A) introduces an additional independence test for compensation committee members.
Responsibility for Executive Compensation:
- The compensation committee is tasked with determining or recommending to the entire board the compensation of the chief executive officer (CEO) and all other executive officers.

These standards are designed to ensure a level of independence and scrutiny in the decision-making processes related to executive compensation within the company.

The Application And Documents

The Nasdaq application package encompasses several key components:

Symbol Reservation Form:
- Used to request the reservation of a specific trading symbol for the company.
Listing Application:
- Requires supplemental documents and details about the company's financials, operations, and other pertinent information.
Listing Agreement:
- A formal agreement outlining the terms and conditions of the listing on Nasdaq.
Corporate Governance Certification:
- A certification affirming the company's commitment to meeting Nasdaq's corporate governance standards.
Initial Application Fee:
- Payable via check or wire transfer, this fee is a prerequisite for initiating the listing process.
Logo Submission Form:
- Used for submitting the company's logo for use in Nasdaq's materials.

These application forms are completed through the Nasdaq website listing center, utilizing the online platform to facilitate the submission of supplemental and supporting documents. It is advisable to thoroughly review all required paperwork in advance, ensuring that the necessary information is readily available before initiating the application process.

Symbol Reservation Form

The symbol reservation form is a concise, one-page electronic form where applicants input information for Nasdaq's consideration. Nasdaq symbols, limited to 1-5 characters, adhere to guidelines established by the Intermarket Symbols Reservation Authority (ISRA). The ISRA system is designed to organize symbols efficiently, prevent duplication, and reduce programming and operational complexities. The ISRA operates within the framework of the NMS Symbology Plan, a plan utilized by Nasdaq.

Key details about the symbol reservation process:

Symbol Choices:
- The form allows applicants to propose three symbol choices in order of preference.
- While Nasdaq generally honors the first choice if available, it retains the authority to assign, rescind, or reassign a trading symbol at its discretion.
ISRA and Nasdaq Authority:
- The ISRA and Nasdaq have overarching authority in managing the assignment of symbols.
Additional Information:
- The form captures essential details about the issuer and the planned public offering.
- Information may include the name of the attorney, lead underwriter (if applicable), CEO and CFO names, yearly revenues, company website, and the sector in which the company operates.

Completion of this symbol reservation form initiates the process of securing a trading symbol on Nasdaq, and it's essential to provide accurate and comprehensive information to facilitate this stage of the listing application.

The Application

The Nasdaq listing application process is comprehensive and varies based on the circumstances surrounding the listing sought. There are twelve distinct listing applications catering to different situations, including changes of control, switches from other exchanges or markets, spin-offs, and initial public offerings (IPOs). Each application, spanning approximately seven pages, collects detailed information about the company, covering areas such as address, contact and billing details, securities attorney and auditor information, transfer agent particulars, and the company's officers and directors. Specific information on the company's securities, including type, par value, and cusip number, is also required.

Furthermore, the application mandates disclosure of legal proceedings involving the company, its officers or directors, or significant shareholders over the past ten years. This encompasses inquiries, investigations, lawsuits, litigation, arbitrations, and other legal and administrative proceedings. Documents supporting the backup and final disposition of these matters must be provided.

Regarding private offerings within the prior six months, including bridge financings, shelf registrations, and Regulation S offerings, the company is required to disclose such activities. Additionally, the application delves into the company's background, posing questions to ensure compliance with seasoning rules.

While Nasdaq retains the right to request relevant supporting documents, specific documents are mandatory based on the application type. For an uplisting from an existing U.S. market, the application must include letters from three market makers confirming their commitment to making a market in the subject securities. Other required documents include a listing agreement, a logo submission form, a corporate governance certification form, regulatory correspondence over the past 12 months, and shareholder confirmation documents. Nasdaq often seeks confirmation from the company's transfer agent regarding the eligibility of the security for the direct registration program (DRS).

During the review of an up listing application, Nasdaq may request additional information, such as a Broadridge share range analysis and NOBO list, a certified shareholder list, details about mitigating any going concerns or opinions, income statement and/or balance sheet projections for the next 12 months, and confirmation of Sarbanes Oxley Section 302 and 906 certifications by the company, among other inquiries related to compliance and financial matters.

The Listing Agreement

The Listing Agreement is a concise document, spanning two pages, serving as a formal affirmation of the company's commitment to adhere to all rules and regulations set forth by the Nasdaq Stock Market. It includes provisions for indemnifying and holding Nasdaq harmless from liability. Notable points in the agreement include:

Compliance Assurance:
- The company explicitly agrees to comply with all rules and regulations stipulated by the Nasdaq Stock Market.
Indemnification Clause:
- The company indemnifies Nasdaq, meaning it undertakes to compensate or reimburse Nasdaq for any losses or damages incurred. This includes harm resulting from third-party trademark infringement claims related to the company's symbol and logo, as well as Nasdaq's use of the same.
Disclaimer of Warranty and Liability:
- The agreement contains a disclaimer of warranty and liability against Nasdaq for trading issues, with the exception of those resulting from gross negligence or willful misconduct.

This agreement establishes a clear framework for the relationship between the listed company and Nasdaq, emphasizing the company's commitment to regulatory compliance while providing indemnification for certain specified matters and delineating the scope of Nasdaq's liability.

Corporate Governance Certification Form

The corporate governance certification form certifies compliance with the governance requirements related to an audit committee, director nomination process, compensation committee, board composition, executive sessions, quorum, and codes of conduct. Where an exemption applies, the form requires specification of the exemption terms. The document specifies the different rules and exceptions in a check-the-box format.

Logo Submission Form

The logo submission form contains the guidelines for the logo and affirms Nasdaq’s rights to use the same. Nasdaq uses company logos in its marketing materials, on the MarketSite Video Wall and Tower, and websites.

Fees

Entry fees are based upon the aggregate number of shares to be listed at the time of initial listing, regardless of class, with a maximum cap of $75,000. Fees are assessed on the entry date in The Nasdaq Capital Market, except for $5,000, representing a non-refundable application fee. This fee must be submitted with the company’s application.

Nasdaq does not charge application or entry fees for any securities transferred from a national securities exchange.

Benefits Of Trading On An Exchange

There are many benefits to trading on an exchange instead of the OTC Markets. The most significant benefits to a business are the ability to attract analyst coverage and institutional investors and the corresponding increase in liquidity that comes with both. Stocks that trade on Nasdaq tend to have a lower bid/offer spread — again encouraging trading volume and liquidity. Exchange-traded securities are exempt from the penny stock definition, allowing more market maker and broker-dealer participation. As further explained below, a broker-dealer cannot recommend a penny stock transaction to its retail clients. Therefore, no analysts, financial advisors, or institutional investors make recommendations for purchases of penny stocks.

As an aside, this is one of the reasons that OTC Markets created the OTCQX market tier, which does not list penny stocks. It is also why the small-cap industry is pushing for a supported valid venture exchange (for further reading.

In today’s world, depositing stock and/or trade-in non-exchange traded securities is increasingly difficult. Despite the congressional efforts and SEC rulemaking in support of small-cap capital formation (for example, the JOBS Act, including the emerging growth company regulations, new Regulation A+ and Title III Crowdfunding and the new FAST Act), through enforcement and investigative proceedings, both the SEC and FINRA continue to apply pressure on broker-dealers, clearing firms and transfer agents to reduce the secondary trading and free flow of penny stocks. For more information on difficulties in depositing stocks.

Further On Penny Stocks

NASDAQ and NYSE MKT traded securities are exempted from the definition of a “penny stock” due to the initial and ongoing listing standards. Penny stock rules focus on broker-dealers’ activity in effectuating trades in penny stocks. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 (the “Penny Stock Act”) prohibits broker-dealers from effecting transactions in penny stocks unless they comply with the requirements of Section 15(h) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The rules promulgated thereunder, particularly Exchange Act rules 15g-1 through 15g-100 (the “penny stock rules”).

Section 15(h) of the Exchange Act provides that no broker or dealer may effectuate a customer’s purchase or sale of any penny stock unless such broker or dealer.

Approves the customer for the specific penny stock transaction and receives a written agreement to the transaction from the customer.
Furnishes the customer a risk disclosure document describing the risks of investing in penny stocks.
Discloses to the customer the current market quotation, if any, for the penny stock, including the bid and ask prices and the number of shares that apply to such bid and ask prices.
Discloses to the customer the amount of compensation the firm and its broker will receive for the trade.

In addition, after executing the sale, a broker-dealer must send its customer monthly account statements showing the market value of each penny stock held in the customer’s account.

Moreover, brokers and dealers subject to the penny stock rules are subject to additional disclosure requirements outlined in Rules 15g-2 through 15g-9. For my information on penny stocks and the rules affecting broker-dealer activity.

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